State House Sound Bites

The art of the swap

State lawmakers are considering changes to a state law to curb risky financing among municipalities and school districts.

A 2003 measure paved the way for such entities to engage in interest rate swaps, and since then, there have been some famous cases of cities and school districts being burned by swap agreements.

An interest rate swap is a complicated bet that can provide up-front revenue, hence the attraction for municipalities and school districts.

At a recent hearing on the capital city’s financing of its incinerator, Steven Goldfield, a bond lawyer with the Public Resources Advisory Group, said swaps are a good tool when used properly. But, he added, that often requires being large enough to have a whole department that manages debt and can understand the complex agreements.

“I don’t want to make a blanket statement that no municipalities can handle this,” said Goldfield to a panel of state lawmakers. “But this is – it’s like a loaded gun. It can protect you, but you’ve got to be really careful, and really trustworthy, and it could go off. And when it does, it could be really expensive.”

There currently isn’t a way for the state to play a policing role in swaps. Tim Anstine, Deputy Chief Counsel at the state Department of Community and Economic Development, said the agency relies on what’s told to it by municipalities and schools entering into swaps.

“They’re not required to get our approval for these swap agreements,” said Anstine. “They are required to let us know they’ve entered into them, and we maintain in our files a log of all the swap agreements that have been entered into by local government units.”

But some say it’s still possible for school districts and cities to better protect their finances.

“Develop a contract or an agreement with their independent financial advisor that would be enforceable if it were discovered that their financial advisor was making money on the swap and that standalone contract would be enforceable,” said Dave Davare, with the Pennsylvania School Boards Association.

The built-in protections, said Davare, would keep the smaller entities from getting burned, and still allow more sophisticated municipalities and school districts to use swaps to their financial advantage.

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